Joint Liability

A joint liability means that business partners are individually fully liable to a debt that have been taken up.

For example, if a mortgage is taken up by two co-borrowers with an agreement between them for equally responsibility on the debt, should just one party be unable to repay, a lender will have the right to pursue any of the partners for the debt due.

It would be technically possible that a creditor pursues the whole amount of an outstanding debt against one single partner with joint liability and totally leave the other partner(s) alone.

This is because both partners are jointly liable for the debt.

This also means that when partners are jointly liable for the actions they take, should one party is at fault, the other party will be responsible for it too.

The implication is that one party cannot claim ignorance and no responsibility to be released from liability caused by the actions of another partner.

Businesses with partnership structures work this way too.

If two partner have networths of $100,000 and $500,000 respectively, the second partner would be exposed to considerably more risks than the first partner. This is because in the event of failure and a mountain of debt to settle, the most the first partner would lose is $100,000 while the second partner has exposure to $500,000.

This is why joint liability arrangements between two or more parties are most often agreed between parties who belong to the same category of net worth.

This is so that both would take on the same magnitude of risks in business ventures or co-investments.

The implications of joint liability is as opposed to several liability.

People going into business together can limit their individual risk by starting private companies limited by shares.

This allows the amount of risks exposure of parties to be properly proportionate however they deem appropriate.

Lenders who underwrite loans and credit facilities to companies limited by shares often desire shareholders and directors to be jointly liable for the debt that has been disbursed But because each person would only be liable for the shares they own, lenders can demand that each shareholder provide a personal guarantee for the debt. This makes it possible for the lender to go after any of the borrowers who provided a personal guarantee for the full debt that is owed.

This is a way that lenders use to convert several liability on a debt to one with joint liability.

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